Employment And Welfare Effects Of A Two-Tier Unemployment Compensation System
In many OECD countries, e.g. in Germany, France, or the UK, unemployment compensation consists of unemployment insurance and unemployment assis-tance. Unemployment assistance is provided subsequent to the expiration of entitlement to unemployment insurance and is lower. The e«ects of this two-tier unemployment compensation system are studied in a general equi-librium job search model with endogenous distributions of income, wealth, and employment which is calibrated with regard to the characteristics of the German economy. Our results are as follows: i) employment is a decreas-ing function of both unemployment insurance and unemployment assistance. ii) Savings are (not) a monotone increasing function of unemployment in-surance (unemployment assistance payments). iii) Optimal unemployment compensation payments are found to be a decreasing function over time.
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